September 26, 2019 - Secondary loan trading volume fell 16% in August to a 14-month low of $51.4 billion. To put that figure in perspective, the last time volumes were below $60 billion was last September. But it wasn’t just the normal end of summer slowdown. August marked the fourth consecutive month where trade activity has stagnated; not rising above $61.3 billion. As a comparison, the market averaged over $68 billion of trading during the three prior months. Interestingly, last month in this space we covered the connection between reduced volatility levels in the secondary and the lower trading volumes we’ve witnessed since May. Clearly August broke trend. The secondary loan market generated its worst reading of the year in August as trade prices decreased by an average of 51 basis points, to an eight-month low of 96.85. The move lower pushed the August S&P/LSTA Leveraged Loan Index return to an eight-month worst of -0.27% (September returns are back in the black, at 0.5%, through press time).But it’s not all doom and gloom in the secondary market – actually far from it. For instance, the median trade price, which decreased 7 basis points to 99.31 in August, has remained at or above a 99 handle for six months running. Today’s median price is just18 basis points off its 2019 high-water mark achieved back in March. From a distribution standpoint, a healthy 25% of the market is trading at a premium to par while just 8% is trading in a sub-90 context. On the liquidity front, the Mark-To-Market median bid-ask spread on the traded universe of loans was reported at 60 basis points in August, just four basis points wider than last month’s 2019 low. Furthermore, despite the recent tumble in trading volumes, activity has totaled a robust $780 billion over the last twelve months – an 8% increase over last year’s record total.
So, why did returns slump and liquidity decline in August? Most significantly, there is a tremendous amount of uncertainty in all markets right now and lenders are becoming increasingly conservative around committing capital, thus affecting demand. We see that trend in the CLO market where August issuance totaled an eight-month low of just $7.3 billion, and is down 12% year-over-year. According to one prominent CLO manager who had just returned from ABS East, “it’s difficult out there, arbitrage has become more problematic to create (as AAA’s have widened) while raising third party equity has turned into a challenge”. Demand was further constrained in August as loan mutual funds reported yet another month of outflows (-$4 billion). Of course, this is not a new trend; loan AUM has declined by more than $50 billion since outflows began back in October of last year. And this reduction in demand has become even more pronounced as the CLO engine slows and ramp-up periods take longer– which seems to be much more commonplace in today’s market.